Israel halts tax funds to Palestinians

Israel's decision to hold about $89 million in tax revenue comes after news of a proposed unity government between Fatah and rival Palestinian faction Hamas. Palestinian leaders condemn the move as an act of 'piracy' and 'war.'

Reporting from Jerusalem — Israel said Sunday that it was delaying the transfer of about $89 million in tax revenue belonging to the Palestinian Authority, the latest sign of souring relations in connection with a proposed unity government between rival Palestinian factions Fatah and Hamas.

Israeli Finance Minister Yuval Steinitz said Israel was concerned that the money — including customs fees and taxes collected by Israel on behalf of Palestinians — could eventually be used to benefit Hamas, which rules in the Gaza Strip, if the militant group announces a new joint government with Fatah as expected later this week.

Hamas, which Israel and the U.S. consider a terrorist organization, refuses to recognize Israel's right to exist and will not renounce the use of violence. Israel holds it responsible for recent rocket attacks on southern Israeli cities by Palestinian militants in Gaza.

When news of the possible unity government broke last week, Israeli officials warned Fatah — a moderate, secular party based in the West Bank — that it would have to choose between ties with Israel or ties with the Islamist group, which has controlled Gaza since 2007 following the collapse of a unity government and brief clashes with Fatah forces.

"The onus is on them to prove that the money we transfer to them — even if it is originally their money — does not go to terror organizations, terror operatives and the procurement of rockets," Steinitz said.

Palestinian leaders condemned the delay, calling it an act of "piracy" and "war."

Palestinian Authority Prime Minister Salam Fayyad said the decision would not discourage the Palestinian parties from finalizing the reconciliation agreement, which is to be signed this week in Cairo.

"We certainly will not stop because of these threats," he told the Palestinian WAFA news agency. "We are in contact with all the forces and international parties with influence to dissuade Israel from proceeding with this act."

Under an ongoing arrangement, Israel transfers about $1.2 billion to the Palestinian Authority each year, accounting for about two-thirds of its budget. Much of the money comes from customs duties paid on Palestinian imports to the West Bank that pass through Israeli ports. Israel is required under past peace agreements to pass along the money.

It's not the first time that Israel has withheld the funds. It suspended payments in 2001 during a Palestinian uprising, and again in 2006 after Hamas won Palestinian legislative elections. After the 2007 unity government fell apart within a few months, Israel resumed tax transfers to the Fatah-controlled government in the West Bank.

Palestinian officials would not comment on whether the new delay would affect their ability to pay salaries to thousands of government workers, due in coming days.

An Israeli government official, speaking on condition of anonymity, said the delay was temporary, but warned that Israel would analyze a new government's policies on such matters as Israel's right to exist, the use of terrorism and acceptance of past peace deals, including the one regarding tax collection.

"It's just a delay," the official said. "There has been no Cabinet decision."

The U.S. and European Union are also likely to review their financial support for the Palestinian Authority in light of Hamas' participation in the unity government. "If Hamas really becomes part of the government, it's not only Israel that will have a problem," the official said.

Some in Israel criticized Israeli Prime Minister Benjamin Netanyahu for moving too aggressively in response to the reconciliation talks and not waiting until a final deal is announced. Former Israeli lawmaker Tzachi Hanegbi warned that Netanyahu might be alienating Palestinian moderates.

"The last thing we should be doing is burning all bridges now," he told Israel Radio. "I would not advise walking away from all contacts with the moderate Palestinian leadership, because we do not have many alternatives."